What does EU referendum mean for fund passporting?

Europe-European-Flags-EU-700.jpgFund groups need to start planning for the loss of fund passporting for their business as a result of Brexit, experts say.

The current passporting regime allows asset managers in member states to take funds domiciled within the EU and market them either in their own country or in other member states. The UK leaving the EU has raised questions over whether that cross-border access will cease.

Global specialist law firm Dechert said in a note asset managers need to consider how their current client and distribution arrangements will be impacted if the UK becomes a ‘third country’ for financial services activities if the UK loses the Ucits and Aifmd passports.

The firm says: “Understanding how to make best use of third country access rights, national private placement regimes and targeted restructuring will give greater certainty to managers and their funds during the period of negotiation and under any new settlement.”

Kirkland & Ellis partner Lisa Cawley says developments on the ‘third country passport’ options will be clearer later this week.

She says: “It is also worth noting that an opinion is expected by the end of this month – so in a couple of days – on whether a passport will be made available under the European legislation applying to fund managers to managers outside the EU.

“A positive opinion has already been given to Guernsey, Jersey and Switzerland with an outcome expected this week on countries including Australia, Canada and Japan. If the so called ‘third country passport’ becomes a workable route that may be a good option for the UK in a post-Brexit world.”

Wealth Management Association deputy chief executive John Barrass says that even though the fund industry has not had “any indication” of what a post-Brexit settlement for fund passporting would look like, they should start planning.

“Firms should start to plan now on what to do. They can either carry on implementing EU-equivalent regulation, which is a preferred route, or they can set up a business out of UK borders or find another firm to take care of their clients,” he says.

However, any of these alternatives will likely be costly for fund managers.

Barrass says: “Bigger firms will be able to set up operations to serve their clients abroad, but smaller firms might have problems. Big firms might start to move their staff but we don’t know yet what the infrastructural element of this is.”

Luxembourg rules currently require €12.5m capital on a firm’s balance sheet for registration, although in Dublin only €300,000 is needed, according to both central banks.

Hogan Lovells global head of financial institutions sector Rachel Kent says a way to save costs could be firms outsourcing part of their business in Europe.

Kent says: “With the reports of the potential relocation of staff and operations from the UK to the EU on Brexit, will come pressures on retaining talent and securing suitable office space in potential recipient markets, such as Paris, Frankfurt, Dublin or Luxembourg.

“This in turn raises the question of whether a UK firm can establish a physical EU presence, regulated in the EU and how much of the regulated activity and back office functions can effectively be outsourced outside the EU back to the current UK entity. This could offer some mitigation against the potential disruption of moving entire UK operations into the EU.”

Kent says outsourcing will depend on the regulations and regulatory policies on either side of the border, as well as the activities being conducted by the firm.

He says: “Local regulators of the EU entity may also want to ensure that the business is itself a substantial organisation with its own mind and management. This could affect the scale to which an outsourced model could be applied.”

The comments come as London mayor Sadiq Khan has vowed to fight to retain access to the European single market and retain passporting for UK firms to operate across the EU.

Khan said that the loss of passporting would be “a disaster” and was worth up to £10bn for the City of London.

However, on Friday, the FCA reassured firms saying UK financial regulation based on EU legislation will remain in place for the “time being”.